When creating a trust, as well as considering the IHT effects, it is also important to consider the tax the trust will pay on income.
The trustees of a bare trust or of a life interest trust, will usually mandate income directly to a beneficiary and the beneficiary will pay income tax in accordance with their marginal rate of tax. The income from the trust is declared in the beneficiary’s own tax return and the beneficiary will pay tax accordingly.
For trustees of a discretionary trust or a trust where the beneficiaries have not yet reached the contingent age and income is being accumulated, it is slightly more complicated and perhaps less favourable.
The first £1,000 of income is taxed at the standard rate i.e. 7.5% for dividend income and 20% for all other income. For income above the basic rate bracket dividend type income is taxed at 38.1% and all other income is taxed at 45%.
This means professional advisers (including the accountants and financial planners we work with on a daily basis) consider very carefully the type of assets that are suitable for each type of trust. When creating a trust or indeed undertaking any form of estate planning, it is not sufficient to consider one type of tax in isolation.
These notes have been prepared for the purpose of articles only. They should not be regarded as a substitute for taking legal advice.